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Schism Atop Bridgewater, the World’s Largest Hedge Fund

Bridgewater Associates founder Ray Dalio and presumed heir apparent Greg Jensen called for votes on each other’s conduct; using the ‘Pain Button’

Bridgewater Associates founder Ray Dalio during a television interview at the World Economic Forum in Davos, Switzerland, in January. Bridgewater has made more money for investors than any other hedge fund in history.
Photo:
NBCU Photo Bank/Getty Images

Employees at the world’s largest hedge fund carry around iPads with an app called “Pain Button.” It tracks negative feelings like “angry,” “frustrated” and “sad” with the twist of on-screen dials.

Pain is part of the “complete honesty” philosophy at Bridgewater Associates LP, which has made more money for investors than any other hedge fund in history. But those same principles have led to an unprecedented showdown atop the Westport, Conn., firm, which manages $154 billion.

Bridgewater founder
Ray Dalio
and his presumed heir apparent,
Greg Jensen,
have called for votes on each other’s conduct.

The 66-year-old Mr. Dalio has asked the firm’s management and stakeholders committees if they believe Mr. Jensen, 42, has “integrity.” The term is defined in a 123-page treatise written by Mr. Dalio as never saying something about a person that you wouldn’t tell the person directly.

Mr. Jensen, one of two co-chief executives at Bridgewater, asked the same group to decide if Mr. Dalio is fulfilling the succession plan he began in 2011.

Bridgewater is known as much for its idiosyncratic culture as its investment prowess, and Mr. Dalio has long espoused that conflict is essential and helps the firm perform at its best. Employees are told to air disputes openly and then try to resolve them, which sometimes escalates into a vote.

The tumult between Messrs. Dalio and Jensen is an extreme example even for Bridgewater. They have never confronted each other so intensely before, according to current and former employees.

In the past, employees have been fired, or “sorted out,” for repeatedly violating the firm’s core principles, according to people familiar with the matter. Bridgewater is run on a set of 210 principles that have been downloaded from its website more than two million times.

Held accountable

Principle No. 72 applies even to the billionaires who lead Bridgewater: “Hold people accountable and appreciate them holding you accountable.”

The potential impact of the disagreement is unclear. The fact that the votes were called at all has unleashed employee anxiety about Bridgewater’s future leadership, people familiar with the matter say.

Messrs. Dalio and Jensen declined to comment in detail about their dispute.

“The question here about Greg is whether he said things about me on tape in our meetings that he did not discuss with me before,” Mr. Dalio said in a written statement to The Wall Street Journal.

Mr. Dalio, Bridgewater’s chairman and co-chief investment officer, said the issue isn’t about “a traditional definition of integrity.” He said he believes Mr. Jensen has “incredible integrity by any traditional definition.”

Mr. Jensen, one of the firm’s two other co-chief investment officers, said in his own statement that the disagreements have been “healthy.”

“It’s the way that they can be resolved that keeps us all here and resulted in the incredible working relationships that have made Bridgewater so successful,” he added. “I can’t imagine working in any other place.”

As of Friday morning, the votes hadn’t been completed, according to a person familiar with the matter. In a statement Friday evening after this article was published online, Mr. Dalio said “this particular dispute has already been resolved via our process.”

A spokesman declined to comment further, including on the status of the votes.

Mr. Dalio has produced an estimated $45 billion in net gains since launching Bridgewater in 1975 from his two-bedroom Manhattan apartment. The gains top all other hedge-fund managers, according to LCH Investments NV.

The firm was born as a research shop that offered global macroeconomic opinions and veered into investing when Mr. Dalio got $5 million from the World Bank’s pension fund in 1985 to trade bonds. Bridgewater has since grown to 1,500 employees.

Because of Bridgewater’s impressive long-term performance, its investors include many of the largest pensions in the U.S., such as the Pennsylvania Public School Employees’ Retirement System, and sovereign-wealth funds.

Bridgewater’s main hedge fund, called Pure Alpha, has an average annual return of about 13% after fees since its start in 1991.

Bridgewater has stumbled a bit lately. For the first time in more than a decade, the firm manages fewer assets than it did a year earlier. A widely mimicked fund that uses passive, automated programs to shift investments among asset classes like currencies and bonds fell 7% last year.

The principles created by Mr. Dalio aim to remove human emotions such as fear and greed from decision-making and maximize profits. He said Bridgewater’s “evidence-based meritocracy” is “not easy for outsiders to make sense of, but it is the secret to our success.”

Shortly after organizing the principles in a written list about 12 years ago, Mr. Dalio had them printed, and some employees began carrying the principles at all times.

“Firing people is not a big deal—certainly nowhere near as big a deal as keeping badly performing people,” he writes in Principle No. 130. Any manager who talks about subordinates who aren’t in the room is “a slimy weasel,” according to Principle No. 5.

Misused apostrophe

While discord is encouraged, Mr. Dalio’s words often are taken as gospel. One former Bridgewater employee recalls debating with other employees for as long as an hour whether a misused apostrophe in one of Mr. Dalio’s research reports was intentional or not.

Mr. Dalio says most employees “are in fact rewarded” for challenging him. About 20% of the feedback he got in the past two years was negative, he adds.

Greg Jensen, co-chief executive of Bridgewater Associates, at the World Economic Forum in Davos, Switzerland, in January. He started at Bridgewater as an intern and rose to become the presumed heir apparent to founder Ray Dalio.
Photo:
Simon Dawson/Bloomberg News

About 25% of new hires leave Bridgewater within the first 18 months, but the turnover rate declines after that, according to the firm. Bridgewater is a major recruiter of recent graduates from elite colleges such as Harvard University, Dartmouth College and the Massachusetts Institute of Technology.

Those who stick around embrace Bridgewater’s philosophy. That includes Mr. Jensen, who started at Bridgewater as an intern about 20 years ago. He became the likely successor to Mr. Dalio after the Bridgewater founder began in 2011 to cede some of his control and ownership.

Bridgewater requires employees to watch professionally edited training videos that use case studies to show how the investment firm’s principles should be used in day-to-day work. Tens of thousands of hours of videos and transcripts are stockpiled in the “Transparency Library.”

One video shows Mr. Dalio standing at a dry-erase board and demonstrating how the marker ink won’t fully rub out with an eraser, according to people familiar with the video. Mr. Dalio prods Bridgewater employees at length about why they bought the dry-erase board, why it doesn’t work and how the bad decision could have been avoided, those people say.

Other videos feature disputes involving high-level executives. A video that Bridgewater titled “Eileen Lies” details the handling of accusations several years ago against
Eileen Murray,
a management committee member.

Bridgewater won’t comment on the accusations, but people familiar with the video say it describes the discovery that a prospective employee’s resume contained a falsehood.

Ms. Murray, who is co-CEO with Mr. Jensen, wouldn’t comment. “I can assure you that if Eileen was assessed to be a liar she wouldn’t be here today,” Mr. Dalio said. “We and she couldn’t imagine her working anywhere else.”

The Lexicon of Bridgewater

Integrity A core principle of never saying something about a person that you wouldn’t say directly

Shaper The ideal leader, who takes an idea from visualization to actualization

While at work, Bridgewater employees constantly rate each other on more than 60 attributes, including “willingness to touch the nerve,” “conceptual thinking” and “reliability,” people familiar with the matter say.

The system feeds data into an ever-growing set of benchmarks, comparable to a stock index, that flag low scores and can eventually lead to a smaller bonus for an employee or even being let go.

In an iPad app called “Dot Collector,” employees weigh in on the direction of conversations while they are happening. Employees also are quizzed about the outcome of meetings. Any meeting of at least three people is expected to hold at least one poll, according to people familiar with the matter.

The average employee accumulates more than 2,000 “dots,” or individual ratings from other employees, a year, a person familiar with the matter says.

Those ratings are distilled into a “Baseball Card” that shows every employee’s average rating for various attributes. The card also includes each employee’s overall “Believability Index,” which reflects how much weight the employee’s opinion has in debates and polls.

The “Pain Button” serves as a kind of diary of unpleasant experiences. It can be used to spot negative patterns, track progress in dealing with conflict and potentially avoid similar experiences in the future.

The app reflects another core tenet at Bridgewater: “Pain + Reflection = Progress.” Employees are frequently encouraged to “get in synch” and hash out their disagreements, current and former employees say.

Bridgewater is working on a new app called “Dispute Resolver.” When it is finished, the app will suggest ways to handle disputes between disagreeing employees, help escalate the dispute to a mediator or even begin the process of forming a tribunal where both sides submit evidence, according to a person familiar with the matter.

The focus on decision-making is related to Mr. Dalio’s belief that “emotional hijackings” can impair decision-making in investments and life.

After honing ideas through debate and discussion, Bridgewater employees write trading algorithms that buy and sell investments automatically, with some oversight.

Those algorithms can be triggered by outside data. For instance, data showing an increase in global shipping might set in motion an algorithm that boosts a particular Bridgewater fund’s exposure to capture profits from the change.

A decade ago, employees rated each other as little as once a year, recalls
Mike Kane,
who spent his first year out of college as an associate at the firm.

“It’s difficult to have a strong company culture as you get larger,” says Mr. Kane, adding that he appreciated Mr. Dalio’s willingness to let young employees take on major responsibility and speak their minds so openly.

After Messrs. Dalio and Jensen called for the votes, about a dozen top employees and stakeholders at Bridgewater began reviewing video recordings of meetings, transcripts and other material to prepare, according to people familiar with the matter.

Voters were told to keep quiet. After the Journal asked Bridgewater about the dispute, the firm warned employees in an email that it would find anyone responsible for leaking information, people familiar with the matter say.

Under Bridgewater’s policies, vote results and each person’s individual votes are made available to the rest of the firm. “All employees see what would be hidden in most companies,” Mr. Dalio said.